Could the future hold great promise for cow/calf producers?

It’s amazing to think back about what has happened in the U.S. beef industry over the past 12 months. In addition to major changes in beef packer ownership, production costs seem to have spiraled out of control

Jason K. Ahola, University of Idaho | Jul 08, 2008

It’s amazing to think back about what has happened in the U.S. beef industry over the past 12 months. In addition to major changes in beef packer ownership, production costs seem to have spiraled out of control.

For instance, today’s $7-8/bu corn is more than double its year-ago price of about $3.50/bu. In fact, corn recently increased about 9% in a single week! Hay in most parts of the country is also substantially higher than last year’s elevated prices. Add onto that diesel today at about $4.65/gal, which dwarfs the $2.85/gal we were paying in July of 2007.

In the midst of these major cost challenges, it’s hard to not get frustrated as a U.S. cow/calf producer and have a bleak outlook on the industry’s future. But, it’s also important to consider the other end of the equation as well.

In today’s marketplace, there are about the same or slightly more total pounds of beef being sold, and generally at a higher average price, compared to a year ago. Combine that fact with the potential for export growth and the recent declining trend for the U.S. cowherd inventory, and it appears that there might actually be some light at the end of the tunnel.

My belief is that if cow/calf producers can weather elevated production costs, major opportunities for U.S. beef may be around the corner.

Expansion or Contraction of Cowherd Inventory Over the past 11 years, the U.S. cow/calf industry has experienced one of the longest periods of sustained profitability in its history. Profits, sometimes in excess of $100/cow per year, were primarily the result of a relatively small U.S. cowherd inventory, coupled with strong consumer demand for beef and reasonable production costs.

About 2 years ago, based on the “stage” that we were at in the cattle cycle – which consisted of a fairly small U.S. cowherd inventory – it was generally projected that the U.S. cowherd inventory would expand and lead to several years of unprofitability. That didn’t materialize, and in fact there was a slow decline in U.S. beef cow numbers due to a combination of factors including widespread drought and rising feed costs.

Today, it’s hard to know what direction our cowherd inventory is headed. Many are predicting that the U.S. cowherd inventory will shrink, possibly even substantially, mainly since producers will be unable or unwilling to cope with the current elevated cost of doing business. It does make sense that many cattlemen will exit the business when faced with higher input costs (feed, fuel, etc.). In fact, current cow slaughter is about 4-5% higher compared to a year ago.

But… Beef Demand is Strong! Granted, there will probably continue to be some exodus of cow/calf producers from the beef business for the foreseeable future, possibly at a similar rate to today’s. But, how widespread will cow liquidation really be? And, more importantly, how widespread ‘should’ it be?

If a cow/calf producer can survive the elevated feed costs expected over the next 2 years (at the least), it seems plausible that a major opportunity may exist after that time. Even in today’s poor U.S. economy – which is currently in recession – we are producing more beef and total meat compared to a year ago. At the same time, Choice and Select cutouts are about $20-25/cwt higher than a year ago (about 12-18% higher) and cull cow cutout values are around $15-20/cwt higher than a year ago (about 15-20% higher).

These elevated wholesale prices for beef are beginning to translate into stronger prices for fed cattle. Fed cattle, which are trading today at nearly $100/cwt live, are up some 10-15% from a year ago. Granted, calves and feeders have been even or slightly lower than a year ago, but recent evidence indicates prices strengthening due to strong cutout values.

But, let’s face it – with corn at nearly $8/bu, it’s amazing that calves are still worth as much as they are – possible evidence that strong demand for beef may help avoid major unprofitability at the cow/calf sector. Just think back to the fall of 1996 – corn averaged about $3.75/bu for the year (it hit a high of almost $5 that fall), but prices for 650 lb calves collapsed down below $60/cwt, primarily due to an excess of cattle supply vs. demand. Today, those same calves are still worth over $110/cwt with corn price twice as high as in 1996.

Export Markets and a Better Economy Unfortunately, the U.S. beef industry is still not exporting as much beef as we could be, particularly to Asia. With a weak U.S. dollar, we have a tremendous competitive advantage that we should be taking advantage – high quality U.S. beef is cheaper relative to meat from competing countries.

According to Cattle-Fax, if we can move past the logistical and political challenges of getting high-quality and high-priced beef and variety meats to Korea and Japan, it’s possible that over $100/head could be added to the value of a carcass. Additionally, with the leading role in U.S. beef packing and feeding soon to be overseen by JBS (the largest packer and trader of beef in the world), U.S. beef could soon be in new and lucrative markets all across the globe.

But, regardless of the status of the U.S. dollar or any trade requirements placed on U.S. cattle by Japan and Korea, global meat demand is skyrocketing. According to the U.S. Meat Export Federation, global meat demand closely follows global GDP (Gross Domestic Product) growth. For instance, global red meat consumption increased nearly 400% from 1960 to today (an increase from about 40 to 160 million metric tons), while U.S. domestic demand growth during that same time was only about 58%.

In addition to taking advantage of global demand for U.S. beef, it’s entirely possible that U.S. domestic demand may strengthen in 2009 if our economy rebounds. Even during a time of major credit crises, elevated fuel and food costs, and general pessimism about the U.S. economy, people are still buying and eating beef. In fact, it seems plausible that beef can, and will, move to a different pricing level, just like fed cattle prices did 5 years ago. Since 2003-2004, fed cattle have been trading in a new range ($80-95/cwt) when compared to the 15 years before that ($65-75/cwt.).

The Bottom Line It may be that it’s just easier to be optimistic about things during the summertime. And, based on the recent run-up in corn over the past few weeks, it’s possible that the major losses experienced by feedyards and packers over the past 18 months may soon be passed on to cow/calf producers. But, we also need to realize that the U.S. beef industry has a unique product that consumers want and are willing to pay for.

We have done amazingly well financially in the cow/calf segment over the past year, even in the face of rising production costs. This is primarily due to good consumer demand, even with lackluster exports and less-than-optimal domestic spending on beef. Profit is affected by both cost and revenue. Therefore, if cow/calf producers can concentrate their efforts on being low cost, it’s entirely possible that those operations can be sustainable once beef’s retail and wholesale trading range moves to a higher level – which is hopefully already in progress.

Dr. Jason K. Ahola is an Extension beef specialist with the University of Idaho. Contact him at [email protected] or 208-454-7654.